How does the EITC affect financial assistance from parents?

• In Event: Tax Policy and Intergenerational Family Wellbeing

Abstract

Background: The extent to which public investments crowd out private investments has implications for the efficacy and efficiency of social spending as well as for the effects of public investments on individual wellbeing. Accordingly, a long literature in public finance investigates whether and how much public spending crowds out private investments in several policy domains, such as public health insurance, public pension programs, cash welfare, and unemployment and disability insurance. However, we have no evidence on how the Earned Income Tax Credit (EITC), which is the largest public program supporting low-income working adults in the United States, impacts financial transfers from parents to their EITC-eligible adult children. The primary beneficiaries of the EITC are low-income, unmarried working women with children, a group that also receives substantial private transfers from parents, raising questions about how these public and private transfers interact with each other. 

Methods: We use data from the Health and Retirement Study (HRS) on parents who are not themselves eligible for substantial EITC benefits, linked to their adult children who are potentially eligible for substantial benefits, and a simulated benefit approach to answer this question. 

Results: We find no evidence that the EITC crowds out private financial transfers from parents to their EITC-eligible adult children. Instead, we find that increased EITC generosity increases the money unmarried mothers receive from their parents, especially amongst those whose labor supply increases in response to credit. EITC generosity also increases the likelihood that parents help their unmarried daughters with childcare. 

Implications: Our findings are consistent with parents investing time and financial resources to support adult children who work more in response to EITC credit generosity and suggest that in the context of public transfers with work requirements, increases in public transfers need not crowd out private support from kin. Moreover, the findings show that the positive effects of the EITC on individuals’ earnings may be amplified by increases in parental financial support. Indeed, the additional financial and time support from recipients’ broader family network that accompanies the EITC may partially explain the positive impacts of the credit on financial, health, and educational outcomes.

Author

• Anna Wiersma Strauss, Indiana University
  Presenting Author